IRELAND & THE IMPACTS OF BREXIT: STRATEGIC IMPLICATIONS FOR IRELAND ARISING FROM CHANGING EU-UK TRADING RELATIONS (PDF; 02/2018; prepared for the Department of Business, Enterprise and Innovation) | Copenhagen Economics
pp.5-6
– A European Economic Area (EEA) scenario, where we assume similar levels of trade costs between the EU and the UK as are currently observed between the EU and the EEA members (Norway and Iceland). The scenario includes duty free trade for most products, though with some tariffs on sensitive products within the agri-food sectors. Border inspections on EU-UK trade will add customs costs. The risk of regulatory divergence for both goods and services is lowest in this scenario.
– A Customs Union (CU) scenario, where we assume that the EU and the UK agree on a traditional customs union agreement. The scenario includes duty free trade for most products, though with some tariffs on sensitive products within the agri-food sectors. Border inspections on EU-UK trade will add customs costs. This scenario implies a higher risk of regulatory divergence for both goods and services relative to an EEA-like scenario, as a standard customs union does not cover regulatory issues for goods and does not address service trade.
– A Free trade agreement (FTA) scenario, where we assume that the EU and the UK agree on a free trade agreement (FTA). We use the effects of an average EU FTA as midpoint estimate, and the scenario includes duty free trade for most products, though with some tariffs on sensitive products within the agri-food sectors. Border inspections on EU-UK trade will add customs costs. As in the customs union scenario, there is a risk of emerging regulatory divergence between the EU and the UK in both goods and services.
– A WTO Scenario (WTO) scenario, where we assume that trade will be governed by WTO rules and other WTO agreements. In this case, the UK and the EU will impose MFN tariffs on each other’s goods where these are not bound by existing plurilateral agreements or arrangements. In addition, we assume that the EU and the UK will continue to use tariff rate quotas both between them and with third countries, which implies that the effective
p.7
– Agri-food, where processed foods, beef, sheep and other cattle meat and dairy are the sub-sectors in which the largest impacts occur, and where trade and production are predicted to fall significantly below the non-Brexit baseline level in 2030. Production in other primary agriculture sub-sectors such as grains, fruit and vegetables, forestry and fishing etc. will also be negatively affected – however, to a smaller extent. Impacts in the agri-food sector are driven by a combination of tariffs, customs costs and the risk of regulatory divergence.
– Pharma-Chemicals, which is the absolute largest export sector in Ireland. Our analysis shows that production in the sector could fall by 1-5 per cent below the non-Brexit baseline production level in 2030. Impacts in this sector are almost exclusively driven by the risk of regulatory divergence and increased border costs.
– Electrical machinery, which includes different types of electronic equipment such as computers, televisions and communication equipment, is another large export sector. Production in this sector is predicted to fall by 5-10 per cent below the non-Brexit baseline production level in 2030. Customs costs and the risk of regulatory divergence are the main factors driving the impacts in this sector.
– Wholesale and retail is an important sector in Ireland. The sector could face new costs in their supply chains as a result of diverging regulatory requirements. The sector will also be negatively affected by an overall drop in consumer demand resulting from Brexit.
– Air transport, which could face substantial challenges on routes to the UK as a result of Brexit.
p.8
… Measured relative to Irish GDP in 2015, the difference between the “best” (EEA) scenario and the “worst” (WTO) is €11 billion in 2030 (in 2015 levels). In a hypothetical situation, where regulatory divergence for goods and services could be avoided and where the Brexit impacts only relate to tariffs and border costs, the theoretical loss to Irish GDP would be further reduced to around 1 per cent of GDP or approximately €3 billion in 2015 terms.
With the objective of minimizing the overall economic loss to Irish GDP, the best possible trade negotiation outcome for Ireland would be an agreement that has an acceptable balance of rights and obligations for all parties and with the following main elements:
– No tariffs
– Large quotas for agricultural products
– Low border costs
– Landbridge transit
– Low regulatory divergence
– Low barriers for service trade
…
1. Trade promotion policies (e.g. helping existing exporters to access new markets, or new exporters to engage in exporting)
2. Enterprise policies (e.g. helping the transition from declining to growing sectors)
3. Skills policies (e.g. supporting skills required by the unavoidable adjustments)
p.11 Figure 1. Ireland-UK trade and investment relation
p.12 Figure 2. Irish trade with the UK and the rest of the world, 2015
p.13 Figure 3. Intensity of trade with the UK
p.14
… Besides both being EU members since 1973, there are many other underlying and historical reasons for why Ireland is uniquely exposed to Brexit:
– Common border and language: First of all, the UK is Ireland’s nearest neighbour and the only country with whom we share a land border. In addition, Ireland and the UK are both English speaking countries
– All Island economy: There is a wellfunctioning all island economy with fully integrated commuting patterns and shopping habits, and a closely knitted value chain across the Island
– Common Travel Area: A common travel area is in existence between Ireland and the UK since the 1920s
– Same consumer taste: In terms of consumer preferences, Ireland and the UK are in many aspects considered as one market with similar tastes and identical products being offered
– Common-law basis of legal systems: The UK and Ireland both have a common-law legal system, which places greater emphasis on previous court decisions, compared to a civillaw legal system, which is in place in other European countries.
– Joint commercial contracts: Commercially, there is a very close integration of business and enterprises across the Irish-UK market. The UK and Ireland are often treated as one market, e.g. in the organisation of many companies, and reflected in many commercial contracts
– UK-only exporters and importers: Like many countries, Irish SMEs are less active in international trade compared to larger enterprises. As a special feature, many of Ireland’s exporting and importing SME’s have the UK as the first and only export/import market and is hence extremely exposed to Brexit
– UK landbridge: Two-thirds of Irish goods exporters make use of the UK landbridge to access continental markets.
p.15 Box 1. UK landbridge is key for Irish trade with the rest of EU
…the agri-food sector where an average of around 40 per cent of exports are destined for the UK. For specific sub-sectors, the UK market accounts for an even greater share of exports, including beef (47 per cent), cheese (60 per cent) and mushrooms (90 per cent)…
…the impact is likely to be more pronounced amongst indigenous firms who account for between 80 and 100 per cent of enterprises in the agri-food sector …
p.16 Figure 4. Exposure to UK market at sector level
p.17 Figure 5. Loss of income due to drop in exchange rate
p.18 Figure 6. UK investment of around €40 bn in Ireland in 2015
p.19 Figure 7. Irish investment in the UK around €90 bn in 2015
p.20
…for the transition period immediately after Brexit in March 2019:
-“Soft Brexit”: This scenario represents a transition arrangement in which duty free trade is continued and no customs clearance procedures are implemented, which in essence means that the UK will remain in the Single Market during the transition period. While this will require a regulatory freeze in the UK and will require the UK to maintain all current regulation aligned to the EU Single Market rules, the scenario assumes a moderate increase in trade costs for both goods and services to reflect the uncertainty around the future trade relationship and the risk of future regulatory divergence.
-“Hard Brexit”: In this scenario, there is no transitional arrangement between the EU and the UK, and both the EU and the UK will implement MFN tariffs on goods, border procedures, and there will be some emerging deviations in regulation for both services and goods. Furthermore, the scenario assumes additional transit costs for Irish goods exported to the European continent across the UK landbridge due to the delays and infrastructural challenges that are expected to materialise in the scenario.
p.21 Figure 8. Future relationship (Barnier slide)
pp.22-23
– EEA:…duty free trade for most products although with some tariffs on sensitive products within selected agri-food sectors. …regulatory alignment with the Single Market rules (e.g. including mutual recognition agreements, harmonisation of some standards, etc.). …will become necessary to impose border inspections on EU-UK trade by whatever means. …UK exporters will be facing higher costs of exporting related to border controls, tariffs and emerging regulatory differences. …
– CU:…the EU and the UK would continue to have a common external trade policy, and the UK will not be able to negotiate its own free trade agreements independently of the EU. Just as in the case of an EEA solution or an FTA solution, the UK exit from the Single Market implies that border checks on EU-UK trade will be needed, unless political agreement on their removal can be reached. …
– FTA:…duty free trade for most products although with some tariffs on sensitive products within selected agrifood sectors. …very limited ability to ensure regulatory alignment with the Single Market rules…
– WTO:…impose MFN tariffs on each other’s goods where these are not bound by other agreements or arrangements. …grant duty free trade on a range of listed products between the signatories… …tariff rate quotas (TRQs) on a range of products whereby imports from third countries can enter the EU with zero or low tariffs up to a certain quantity for a given time period, …
p.24 Figure 9. Overview of scenarios
p.25
…the complexity of the rules of origins…, the sensitivity of the good to delays… and the complexity of the value chain of the affected good
…In the EEA scenario, the average regulatory costs are estimated at 7 per cent corresponding to the average of the EU’s other EEA agreements (with Norway and Iceland).
In the Customs Union and FTA… on average 10 per cent… corresponding to the average of the EU’s other FTAs.
Finally, in the WTO… …increase up to 24 per cent…
p.27
If no regulatory divergence occurs between the EU and the UK, Irish goods exports will face additional trade costs related to tariffs and customs procedures corresponding to an average 4-5 per cent trade cost in the EEA, CU and FTA scenarios and around 7-8 per cent additional trade cost in the WTO-scenario. …
If regulatory divergence occurs in the long run… EEA…12 CU…14 FTA…14 WTO…32 …
p.32 Figure 11. Long-term impact of BREXIT on Ireland’s total exports
p.33 Figure 12. Long-term impact of BREXIT on Ireland’s total imports
p.34 Figure 13. Long-term impact of BREXIT on Ireland’s GDP
p.35 Figure 14. Development of Ireland’s GDP with and without Brexit
p.36 Figure 15. Impact on real wages for Irish high and low skilled workers
p.38 Figure 17. Ireland’s goods trade per sector with UK and the Rest of the World
p.39 Figure 18. Ireland’s trade per sector with UK and the Rest of the World
p.40
Figure 19. Ireland’s key goods export sectors to the UK
Figure 20. Ireland’s key service export sectors to the UK
p.41 Figure 21. Key goods import sectors from the UK
p.42 Figure 22. Key service import sectors from the UK
p.43 Figure 23. Output changes in two scenarios for Brexit in 2030
p.45 Figure 25. Key sectors explain over 90 per cent of GDP impact
p.46 Figure 26. Profile of key sectors
pp.46-51
Impacts on production and exports in the sector [processed foods]
– Total exports in the processed food sector would be 15-31 per cent below the 2030 non-Brexit baseline level in the EEA and WTO scenarios respectively, and 16-17 per cent below in the FTA and CU scenarios.
– Exports to the UK would be 40-87 per cent below the 2030 non-Brexit baseline level in the EEA and WTO scenarios respectively, and 45-49 per cent below in the FTA and CU scenarios
– Production in the sector would also be negatively affected in all scenarios ranging from -10 per cent (EEA) to -21 per cent (WTO) compared to the 2030 baseline production level. The impact in the CU and FTA scenarios is -11 per cent to -12 per cent.
– Employment would be affected proportionately to production in the scenarios, i.e. a 10 per cent reduction in production would lead to a 10 per cent reduction in employment compared to the 2030 baseline.
Impacts on production and exports in the sector [beef, sheep and other cattle meat]
– Total exports from the beef sector would be 18 per cent below the 2030 non-Brexit baseline level in the EEA and CU scenario and 35 per cent below in the WTO scenario. In the FTA scenario, the impact would be 22 per cent below the baseline.
– Exports to the UK would be 29-53 per cent below the 2030 non-Brexit baseline level in the EEA and WTO scenarios respectively, and 28-35 per cent below in the FTA and CU scenarios.
– Production in the sector would also be negatively affected in all scenarios ranging from -11 per cent (EEA) to -23 per cent (WTO) compared to the 2030 baseline production level. The impact in the CU and FTA scenarios would be -12 per cent and -14 per cent.
– Employment would be affected proportionately.
Impacts on production and exports in the sector [dairy]
– Total exports from the dairy sector would be 18 per cent below the 2030 non-Brexit baseline level in the EEA scenario and 40 per cent below in the WTO scenario. In the FTA and CU scenarios the impact would be 19 and 20 per cent below baseline, respectively.
– Exports to the UK would be 35 to 76 per cent below the 2030 non-Brexit baseline level in the EEA and WTO scenarios, respectively and 37 to 38 per cent below in the FTA and CU scenarios.
– Production in the sector would also be negatively affected in all scenarios ranging from -8 per cent (EEA) to -18 per cent (WTO) compared to the 2030 baseline production level. The impact in the CU and FTA scenarios would be -9 per cent to -10 per cent.
– Employment would be affected proportionately.
Impacts on production and exports in the sector [pharmaceuticals and chemicals]
– Total exports from the pharma-chemicals sector would only be 1-5 per cent below the 2030 non-Brexit baseline level in the scenarios analysed … A 5 per cent decline in exports from this sector is, however, still a large amount given the size of the sector (a 5 per cent drop in pharma-chemicals is for example more than the entirety of Irish beef exports).
– Exports to the UK would be 7-42 per cent below the 2030 non-Brexit baseline level in the EEA and WTO scenarios respectively, and 20 per cent below in the FTA and CU scenarios
– Production in the sector would also be negatively affected in all scenarios ranging from 1-5 per cent below the 2030 baseline production level.
– Employment would not be equally affected since the sector would still be one of the more productive sectors and can offer attractive wages, which would help to retain and attract labour from other sectors in Ireland.
Impacts on production and exports in the sector [electrical machinery]
– Total exports to the world from the electrical machinery sector would be 5-9 per cent below the 2030 non-Brexit baseline level in the scenarios analysed.
– Exports to the UK would be 34-40 per cent below the 2030 non-Brexit baseline level in the EEA and WTO scenarios, respectively and 20 per cent below in the FTA and CU scenarios.
– Production in the sector would also be negatively affected in all scenarios ranging from 5-10 per cent below the 2030 baseline production level.
– Employment would be 2-5 per cent below the baseline employment since the sector would still be one of the more productive sectors and can offer attractive wages, which would help to retain and attract labour from other sectors in Ireland.
Impacts on production and exports in the sector [wholesale and retail]
– Total exports from the retail and wholesale sector is in itself not the key parameter. Rather, the impact in the sector is seen more clearly from the increased costs of imports of various consumer goods from the UK, most notably processed foods.
– Production in the sector would be negatively affected in all scenarios ranging from 2-4 per cent below the 2030 baseline production level depending on the scenario.
– Employment would be relatively less affected since a large number of retail outlets around the country would still be needed despite a drop in demand.
pp.51-55 4.8 Impacts in other service sectors
Air transport
Financial Services
Insurance
ICT and Business Services
Tourism
pp.56-59 CHAPTER 5 Policy Options for Ireland
5.1 Negotiating the best possible outcome
… The EEA-scenario will reduce Ireland’s GDP to a level 2.8 per cent below the non-Brexit baseline (or €7 billion in 2015-levels) compared to a WTO-scenario, which is foreseen to bring Irish GDP 7.0 per cent below the non-Brexit baseline in 2030 (corresponding to €18 billion in 2015-level). …
… In a hypothetical situation, where regulatory divergence for goods and services could also be avoided, and hence the Brexit impacts only related to tariffs and border costs, then the theoretical loss to Irish GDP would be further reduced to around 1 per cent impact on GDP or approximately €3 billion in 2015-level. …
…the best possible trade negotiation outcome for Ireland would be…
– No tariffs: Avoid imposition of any tariffs on future EU-UK trade – duty free for all products
– Large quotas: If some tariffs have to remain on agriculture products, sufficiently large tariff quotas should be pursued to cater for expected future trade levels
– Low border costs: EU-UK border costs on both sides should be minimised by using state-of-the art technology and procedures, including use of authorised economic operators as much as possible to minimize border costs
– Landbridge transit: Arrangements should be made to ensure undisturbed transit to/from Ireland via the UK landbridge
– Low regulatory divergence: Mechanisms should be put in place between the EU and the UK to avoid and minimize regulatory divergence and protect against emerging divergence as the EU or the UK develops their technical regulation further. Such mechanisms and the related dispute resolution mechanisms should apply to all areas currently covered by common EU regulation and rules (the harmonised area). For Ireland, this is important generally and would, in particular, be important for:
≫ Beef
≫ Dairy
≫ Processed food
≫ Pharmaceuticals, cosmetics and chemicals
≫ Electrical machinery
– Low barriers for service trade: As for goods, similar mechanisms would be needed for services to avoid regulatory divergences and excessive trade costs. This would be important for all Irish service sectors, and notably for:
≫ Air transport
≫ Financial and insurance services (continued passporting, or strong equivalence)
5.3 Domestic enterprise policy responses to mitigate Brexit impacts (minimizing threats)
…three broad categories:
– Trade promotion policies (e.g. helping existing exporters to access new markets, or new exporters to engage in exporting)
– Enterprise policies (e.g. helping the transition from declining to growing sectors)
– Skills policies (e.g. supporting skills required by the unavoidable adjustments)
5.4 Domestic policies to pursue the opportunities from Brexit
Trade opportunities
Just as Irish exporters will face new barriers in the UK market, so will UK exporters in the EU market. This implies that UK products or services will be more expensive in the EU market, meaning that customers in other EU countries currently served by UK firms will be looking for alternative suppliers. This can present opportunities for Irish exporters, especially since there are many overlaps in the products export from the UK and from Ireland. One example could be cheese exports, where Irish cheese could replace British cheese in other EU markets. And similarly, for other products or services. These adjustments are already factored into to our analyses and quantifications, but the extent to which it takes place in reality depends on the actions taken by Irish exporters and how these opportunities are supported by Irish policy actions.
Talent opportunities
The general decline in economic activity in the UK following Brexit and in particular the uncertainty and sentiment of EU citizens in the UK presents another opportunity for Ireland. As the only English speaking country in the EU, aside from Malta, and with diverse job opportunities, Ireland can become a new home for talents deciding to leave the UK post-Brexit. This would particularly relevant in sectors and positions where there are already shortages in Ireland and where even the best re-schooling and job training (as per above) cannot meet the demand. This could include IT-specialists, researchers, financial service expert for example. Again, active and timely policies from the Irish government and local authorities can help maximise these opportunities.
Investment opportunities
The biggest opportunities in relation to Brexit is likely to be within the investment area. Ireland is already an attractive location in Europe for foreign direct investment (FDI), and with the right additional policies, Ireland should be wellplaced to attract entire companies or parts of multinational companies wanting to be located within the EU and in an English speaking common law country.
